Friday, September 30, 2011

Greek Crisis Reveals EU's Tragic Flaw

by Stephen Fidler

Wall Street Journal

September 30, 2011

In his influential 1910 tract "The Great Illusion," the writer Norman Angell argued that nations were so financially and economically interdependent that war would damage the winner as much as the loser. Under these circumstances, he argued, no nation would be foolish enough to start one.

His analysis about the economic catastrophe of war would prove correct; his conclusion about government decision-making was tragically wrong. Four years later, the countries of Europe would join in horrific conflict.

The warnings about the economic consequences of a Greek exit from the euro zone—which could follow from a default on its debts, but isn't an inevitable consequence of one—suggest it is an outcome that rational policy makers would seek to avoid.

It would be "a financial and economic disaster not only for Greece, but also for 16 continuing euro-area member states," argued Willem Buiter, Citigroup's chief economist, in a research note this month. It would trigger "bank runs in every country deemed, by markets and investors, to be even remotely at risk of exit from the euro area." Investors and lenders to these countries would, in effect, go on strike. The effects would reverberate around the world.

Others estimate that a withdrawal by Greece or any other weak economy could cost the country 25% or more of gross domestic product in the first year. Even if a strong economy left, the price it would pay would be huge.


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